The idea of a disaster recovery plan is that you put in place the plan before the disaster happens. Interest-only mortgages have been described as a ‘ticking time bomb’ but there seems to be a lack of solution to diffusing the threat.
Financial Services Authority figures suggest about 1.5m interest-only mortgages worth £120bn will be due for repayment this decade (2011-20). That means about 150,000 loans maturing each year of which it believes about 60,000 will not be paid off. Of those, seven out of 10 will be held by the over-60s and six in 10 will have no specific repayment strategy.
This bomb has a slow fuse, dating back to the sales – and mis-sales – of interest-only loans and endowment policies in the 1980s and 1990s. The FSA included capital repayment of interest-only loans as a ‘potential concern’ in its Retail Conduct Risk Outlook published earlier this year.
That ‘potential concern’ quickly turned into something far more explosive when the FSA’s Martin Wheatley told the Treasury select committee last month that the issue was a “ticking time bomb that has been created over the last 20 years”.
The MPs were concerned that new rules tightening mortgage lending could have a serious impact on many over 50s who find themselves unable to repay their interest-only loans at maturity and are prevented by the tougher new regime from rolling over into new interest-only loans.
The worry is that these people will be stranded at a time of life when they have given up work and don’t have many alternatives. Mr Wheatley, at one point accused of complacency, admitted he did not think regulation can solve the problem adding “I think individuals will have to take their own advice as to how they do that if they have a strategy that will not repay the capital at maturity”.
Perhaps prompted by the incendiary headlines, the Council of Mortgage Lenders attempted to pour oil on troubled waters but in some ways has added further fuel to the fire.
It said it was “likely” that a significant proportion of the interest-only loans reaching maturity over the next few years had a repayment vehicle, although its data cannot identify the precise number.
It also pointed out that many of the borrowers bought when house prices were much cheaper and have a significant equity cushion. That might be a solution to owners who are willing to sell. Putting aside the transaction costs, we know from our research that people at retirement often prefer to stay in their own homes, in the neighbourhoods they know and close to friends and family and to maintain space to accommodate the arrival of grandchildren.
The CML’s main strategy still appears to be better communication with borrowers in a bid to head off the trouble before it strikes, persuading them to put away more now so that they can pay off the capital at maturity. This is unlikely to make much difference to those unable or unwilling to save extra.
Solutions are needed this week and this year, not at some unspecified point in the future. As a leader in the equity release market we are approached every day by individuals who have little option but to meet the demands of their existing mortgage lender and replace that arrangement by utilising an equity release solution. The trickle of cases is already accelerating and could become a flood that propels equity release into the mainstream as the only practical solution for thousands of customers over the next 10 years.
The Mortgage Market Review may be designed to head off the problems of the future, but where are solutions to the problems of the present?
